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Our Financial Perspective Quarterly Newsletter
The H Group, Inc. - Salem Financial Perspective is a quarterly newsletter that traces its roots to January 1992, when Ron (now retired) began writing Kelemen's Financial Perspectives. Unlike other newsletters, we write each and every article. We hope you find the information provided to be informative and useful. From time to time, other articles written specifically for our clients on a timely issue or for certain publications, may appear below. Please remember that all articles are copyrighted and can not be reproduced without permission.
September 2017 | Vol. 26, No. 3
1. Can Your Student Loans Be Forgiven?
Our clients often express concern about the debt that they, their kids or their grandkids are saddled with straight out of college. Here's our Here's our attempt at cutting through the noise and make this complicated subject a little easier to understand.
2. The Grey Areas of Estate Planning.
Most people are cognizant and capable of handling their finances. Some are mentally incapacitated due to Alzheimer's or dementia. But what about the grey area when you are in between? Perhaps a diminished capacity directive may help you in the future.
3. Debbie Retired!
We've known that Debbie was going to retire several years ago. There is nothing like a home selling quickly and a new grandchild to speed up the process. We will miss her!
4. Will Social Security Be There?
Yes, but maybe not as much in the future. We discuss the latest 2017 Social Security Trustee report and its implications for the long-term outlook for current and future Social Security beneficiaries.
5. Your Road Trip to (and Through) Retirement.
Retirement planning is a lot like taking a road trip. We think this analogy will help you better understand the big picture of planning and enjoying retirement.
5. Team Update
Here's what's going on with us. Be sure to check out the news about Ron and Kathy.
Can Your Student Loans be Forgiven?
Our clients often express concern about the debt that they, their kids or their grandkids are saddled with straight out of college. In the last several years, news about the possibility of loan forgiveness has surfaced. If ever there were a program that fully embodied the nuance, complication and confusion that often accompanies government initiatives, the Public Service Loan Forgiveness Program (PSLF) might be it. Here's our attempt at cutting through the noise and make this complicated subject a little easier to understand.
The Basics: Federal vs. Private Loans
Federal student loans offer more flexibility and lower rates than private loans. Undergraduates can expect to pay around 4.45% in interest; graduate students about 6% and parents PLUS loans have an interest rate of around 7% - all numbers that increased slightly from their July rates. Private loans often start out lower to entice borrowers, but increase exponentially over a short period of time. Federal lenders allow consolidation and are keen to work with their borrowers, adjusting payment requirements if needed. Private lenders are more likely to hold their borrowers' feet to the fire, requiring quicker repayment at higher rates, even bringing on lawsuits for missed repayment in some cases. Remember, student loan debt is a ‘death till you part' arrangement — even bankruptcy won't rid students of the financial burden (with very few exceptions).
Requirements For Forgiveness
The PSLF program was started in 2007 under the Bush administration in an effort to combat the student loan debt plaguing fresh-faced (or in this case, depressed-faced) graduates. It allows some individuals to have their student loans forgiven, tax free, after 10 years. To take advantage of PSLF, a graduate must qualify their loans, make qualifying payments and work for a qualified employer. How's that for ambiguous? Let us translate. Here's how graduates can become eligible for student loan forgiveness:
1. Consolidate their loans under the federal Direct Loan Program. This rules out about 44% of federal student loan borrowers who carry loans outside this program. How to accomplish this? First, they'll want to head to the National Student Loan Data System's website (www.nslds.ed.gov) and assure they have a handle on every loan they've taken out. Next, they'll begin the process of consolidating those loans with the help of the Federal Student Aid website (studentaid.ed.gov). Beware of bogus sites offering assistance in loan establishment or consolidation. Because PSLF is a federal program, legitimate websites should end in .gov. If they don't, red flags should go up.
2. Make 120 qualifying payments. A qualifying payment is: a. Made through a qualified repayment plan (e.g. income-driven repayment). b. Made after October 1, 2007 for the full amount due within 15 days of the due date. c. Made while employed by a qualifying organization.
3. Work for a qualified organization. PSLF is available to employees of the government, a nonprofit organization or a company that provides public service. If you're a graduate who is weighing your options on employment, check that the employer will fall under one of these categories. You will also need to complete a PSLF employment certification form to keep track of the years you work for a qualified organization.
The Future of PSLF
This fall will mark the first time students see the impact of this program as PSLF will celebrate its 10th birthday October 1, 2017. When that happens, we expect to see new studies and analysis on its projected longevity and effectiveness. There are several proposals that would impact the program as it stands today. In some, graduate students would be hit hardest as opportunities for income-based repayment and the length of repayment are changed (forgiveness pushed out from 20 to 30 years). Undergraduate students may see a bit of a break, with repayment plans based on 12.5% of their discretionary income (vs. the current 10%), but similarly their window for forgiveness may be pushed out from 10 to 20 years. Subsidies for low and moderate income students may go away. These often come in the form of interest payments covered by the lender while the student is in school or temporarily out of work (the cumulative interest may be tacked to the end of the loan instead). Like many of the initiatives before our administration, these are all proposals that would require approval of Congress before any changes are made. One thing that is clear is that at this point, any loans made before July 1, 2018 would still be eligible for the PSLF program.
The Gray Areas of Estate Planning
Estate planning can sometimes be black or white: a living trust versus a testamentary trust; a Donor Advised Fund versus a Charitable Remainder Trust. There are also many gray areas that apply to situations between life and death. It's common for estate planning attorneys to recommend — in addition to your will or living trust — that you carry a durable power of attorney. This document appoints a person to care for and make decisions on your behalf in the event that you are incapacitated.
We understand the role of the durable power of attorney, but what about the time just before that document is needed? It's rather uncommon to have completely normal brain function one day, then complete loss the next. Typically, cognitive decline is more gradual than that.
According to the Alzheimer's Association, more than 5 million Americans are living with the disease. By 2050, that number could triple. What would be the signs that you were losing cognitive function? Missing a child's birthday or forgetting to take an important medication might be indicators. It's a good idea to come up with a check list of a few regular memory-related items that you and your family can use to determine if and when you need some assistance. This takes both bravery and honesty; this check list doesn't do you any good if you don't share it with someone. In addition to the role that your durable power of attorney plays, we've found that using a form called a diminished capacity directive can help in this gray area. It is essentially an agreement between the two of us, stating that if we suspect there may be some form of cognitive impairment, we have your permission to contact a close relative or friend of your choosing. If you're a part of our client family, we'll likely be discussing this document with you at your next update meeting. This is one of the many benefits of establishing and maintaining a long term relationship with a financial professional — we know you, and we can recognize unusual behavior, tone or mood. While we love to plan for and celebrate the achievement of your lifelong dreams, another part of our commitment is to think ahead and do what we can to protect you, even when it's from yourself.
After 17 years with our office, Debbie Renggli has joined the ranks of several of our clients in retirement. She and her husband Bob sold their Salem home just a few weeks after it went on the market. They have moved to Sisters, where they've vacationed for several years and feel right at home. As they often do, a grandchild helped to expedite her retirement goals. Quinten is nearly a year old now, and although he can't talk, we're sure he's excited to have more time with grandma too.
You won't be surprised to know that we've been planning for Debbie's retirement for several years. We are planners, after all. We've adopted software that will help make the client service that Debbie knew inside and out easier and more efficient (preparing paperwork, processing transfers and reporting to name a few). In addition, our office manager Michelle has been cross training with Debbie for over 3 years in preparation for her departure.
We wish Debbie all the best for a happy, healthy and joyful retirement and we are so grateful for her loyalty and dependable service.
Will Social Security Be There?
We frequently hear comments like "Social Security won't be there for me," or "The Social Security trust fund is almost bankrupt." Part of our job as advisors is to put things into perspective for clients. We deal in facts as we know them today and use that information when making planning assumptions. One of those facts is that Social Security will be around for a long time, but not exactly in the form it is today.
Every July the trustees of the Social Security Trust Funds for the Old-Age & Survivors and Disability Insurance (OASDI) release their annual report1 on the health and long-range outlook of Social Security. The good news is that more money is still coming into the funds than going out.
Where does this money come from? Mostly from workers and their employers still paying into the system and from bond interest on the reserves. Five decades ago, there were four workers for every beneficiary, according to Social Security.gov, which helped to build reserves totaling over $928 Billion. Today there are less than three workers per beneficiary as the baby boomer generation moves into retirement.
Starting in 2010, contributions from workers weren't enough to pay current beneficiaries, so the reserves are being tapped to supplement the shortage from payroll taxes. These reserves will be depleted by 2034, the same as projected last year. At that time, benefits can only be paid by incoming payroll taxes, projected to be 77% of what beneficiaries are scheduled to receive, including their cost-of-living adjustments (COLAs).
Those retirees in their late 70s or early 80s with normal life expectancies can expect business as usual. Those just now entering retirement without sufficient savings or other income sources may experience a 23% pay cut 17 years from now. So, the lesson is: don't count on Social Security for 100% of your retirement income.
The reserves can last longer if changes are made; and the sooner, the better. The report projects that increasing the payroll tax by 2.83% could extend the longevity of the trust fund to 2090 and beyond. The American Academy of Actuaries has suggested several fixes. In the words of the Academy, "The problems facing Social Security, when placed in the context of the enormous U.S. economy, are not nearly as daunting as they might seem when presented in stark dollar terms…the need for such tax increases can be reduced, or even eliminated, by changes in benefits and other features; and any required changes can be phased in gradually."2
That's the good news. Given today's political climate and gridlock, we don't expect any changes soon, and that's the bad news.
We encourage you to plan ahead for reduced benefits down the road. We can help you do that, showing you how such changes may affect your retirement cash flow. Meanwhile, ignore the scare rhetoric about Social Security going completely bankrupt. Changes are afoot, but under the most current report, beneficiaries will still get full benefits through 2034.
1 The 2017 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. July 2017; Social Security.Gov.
2 Social Security Reform Options, March 2014, American Academy of Actuaries; Actuary.Org. OASDI Income, Cost, and Expenditures as Percentages of Taxable Payroll [Under Intermediate Assumptions] Source: 2017 Social Security Trustees Report.
Your Road Trip to (and Through) Retirement
If you were preparing for a road trip, what would be your priorities? Would you plot out every stop along the way, or keep it loose? Pack your meals, or eat out? Your road to and through retirement can be everything you hoped for — including spontaneous — if you plan for it.
Fuel: Your Resources
You can't get too far without these essentials. Your 401(k), pension and Social Security are all a part of the resources that will take you through retirement. In addition, it's a good time to take stock of your life, health and long term care insurance policies.
Destinations: Your Goals
What keeps you cruising? For some it's international travel and a timeshare; for others, it's a new car every 5 years and helping their grandkids through college. Setting realistic and achievable goals is a key part of retirement planning. Without them, how will you know which direction to head in?
Tune Up: Your Portfolio
Before you set out on a new adventure, it's important to get a tune up. Revisiting your portfolio and allocation can make a big difference. Often, the allocation set during your working years needs some tweaking as you move from accumulating wealth to preserving and spending your hard earned assets. Likewise, it's a good idea to surround yourself with investment experts to help monitor accounts that were previously on cruise control.
A Map: Your Plan
Would you rather use a paper map, or one that is customized with information on your unique route? A personalized financial plan can help you to plan for and achieve the retirement you want, help you plan for the unknowns and give you confidence on just how spontaneous you can be.
Bumper Sticker: Your Legacy
What do you want people to remember as you drive off into the sunset? There are things you can do today to help plan for and craft the legacy you want to establish. Whether it's charitable gifting, an inheritance for your children or simply streamlining your estate to avoid probate, a plan can help you get there.
An Advisor: Your AAA
Even a well thought out route can and will come with potholes, flat tires and other setbacks. Consider us the AAA of your retirement. Year after year we can work together to update your plan, dream up new goals and, when necessary, plot out a course correction.
Michelle continues to work hard as she steps into more and more of Debbie's role around paperwork, processing distributions and other client service activities. She is staying active in the community by continuing her volunteer work with Rotary, the Willamette Heritage Center, NAMI (National Alliance on Mental Illness) and the Elsinore Theatre. She just returned from a family reunion in Nevada.
Just as our last newsletter was going to press, Katherine was flying down to San Francisco to attend the Financial Planning Association's NorCal Conference. This two day, information packed conference brings together some of the most knowledgeable and respected speakers in our industry. She and Duane headed to San Francisco a couple days early to meet their son and daughter-in-law who arrived from Los Angeles. They had a wonderful time together - particularly a very relaxing day in Sonoma.
Brenna is enjoying being back into the swing of things (and, adult conversation!) as she has returned to full time after her maternity leave. She continues to shadow and take over for Ron in his marketing responsibilities — including heading up this newsletter — but still spends most of her time on serving our client families. She, Ben and Mika took a road trip to Montana over the 4th of July holiday for a family reunion with 15 adults and 6 kiddos. Mika is around 6 months old now, enjoying time with her grandparents who moved nearby to be a big part of her life.
Larry and Laurie have been enjoying the summer by playing backgammon and cards by the small pond Larry put in the back yard. After 3 years of puttering around the yard Larry says he's finally finished. They also enjoyed a concert by Clint Black in Lincoln City and Larry took time to visit clients in both Bend and Florence.
Ron announced to our clients his and Kathy's plans to retire in November. Since then he has been busy writing "cookbooks" on how he does things, such as this newsletter, our quarterly updates, marketing, etc. They celebrated their 40th wedding anniversary with their daughters and their boyfriends for a week at a lodge near Glacier Bay National Park, Alaska. You can see some photos and read about it in their blog at www.rwk777.blogspot.com.. Don't forget to mark your calendars for the November 2nd retirement party where we'll get to celebrate the legacy that Ron and Kathy have built.
The opinions expressed in this newsletter are those of Ron Kelemen, CFP®, Larry Hanslits, CFP®, Brenna Baucum, CFP®, and Katherine Suchan, CFP®, CLU. They do not necessarily reflect those of The H Group, Inc. They are general comments that may not be appropriate for every individual. They should not be construed as legal or tax advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic information is historical and not indicative of future results.